Suncor – a “no-brainer”?

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Jan 3, 2014

by Max Fawcett

Is Suncor a “no-brainer” investment? That’s the case that Baskin Financial’s Barry Schwartz makes in a recent blog post, in which he lays out the bullish case for Alberta’s biggest energy company. “What if you could buy a business that you knew would be in operation for at least 30 years at its current rate. What if the business was being valued at less than half it was five years ago, even though its cash flow and dividend have more than doubled? And, what if you could buy a business where its product is needed every day and the demand for its product will most likely grow over time? Finally, what if that investment was endorsed by the world’s greatest investor? Would you call that a “no brainer” investment? I would.”

And while Suncor doesn’t trade at the premium it did back in 2008, when Warren Buffett kicked the tires on the company, he thinks that’s simply a matter of perception rather than value. “While Suncor was once rewarded with a premium multiple for having more than three times the reserves of other large capitalized oil companies, it now trades at a deep discount,” Schwartz writes. The only question in his mind, it seems, is when that discount will disappear – not if.

But lest this blog become too bullish itself, here’s a link to the latest from the Telegraph’s Ambrose Evans-Pritchard, who outlines the various doomsday scenarios that could unfold for investors in 2014. His first prediction? A big rally by the U.S. dollar driven by both gathering economic strength and tightened monetary policy will push Europe back into crisis. “Euroland will be hit on two fronts by Fed action,” he writes. “Bond yields will ratchet up, shackled to U.S. Treasuries. Emerging market woes will ricochet into the Eurozone. The benefits of U.S. recovery will not leak out as generously as in past cycles. Dario Perkins from Lombard Street Research says the U.S. is now more competitive than at any time since the Second World War. America is poised to meet its own consumption, its industries rebounding on cheap energy. Europe will have to generate its own stimulus this time. Don’t laugh.”

And while he thinks that Europe is at least capable of generating that stimulus, the biggest concern may lie to the east in China, which may not be able to stickhandle its way around a potential crisis of its own. “The sino-bubble is galactic. Credit has grown from $9 trillion to $24 trillion since late 2008, as if adding the U.S. and Japanese banking systems combined. The pace of loan growth – 100 per cent of GDP over five years – is unprecedented in any major economy, eclipsing the great boom-bust dramas of the past century. The central bank is struggling to deflate this gently, with two spasms of credit stress in the past six months. I doubt it will prove any more adept than the Bank of Japan in 1990, or the Fed in 1928, and again in 2007. This will be a bumpy descent.”